Many Parts of the Country Never Had a Bubble

“A front-page Wall Street Journal feature, titled “Housing Recovery Stalls,” worries that “a new bout of declining home prices is threatening to hamper the U.S. recovery.” A dip in the Case-Shiller moving average of home prices in 20 cities for August to October is said to be “troublesome headwind” for the economy in 2011, and “markets such as Sacramento, Las Vegas and parts of Arizona and Florida are at risk of more declines.”

Some of those cities may indeed account for a significant share of the Case-Shiller index, because that index covers only 20 cities (and Sacramento, the centerpiece of the story, is not one of them). However, a few troubled cities in a few states do not represent the entire nation.”

Alan concludes that, among other factors, “anxiety about falling home prices is based on a limited sample of 20 cities.”

Reynolds also refers to a WSJ editorial from yesterday, where Peter Schiff warns that “…third quarter 2010 declines in the Standard & Poor’s Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a “double dip” in home prices is probable.”

MP: The chart above of FHFA house price indexes in eight states (data here) helps to support Alan Reynold’s position about falling home prices being heavily concentrated in large cities that are included in the Case-Shiller home price index. While states like Arizona, Florida, Nevada and California have experienced housing bubbles and huge price declines in recent years, many other states like South Dakota, Iowa, Oklahoma and Texas have seen fairly steady, but very mild increases in home prices, with no bubbles and no housing price corrections. Especially in many states in the middle of the country stretching from Texas all the way up to the Dakotas, it will be hard to have a “double dip” in home prices because they haven’t yet had the “first dip.”

Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.

He holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University in Washington, D.C. and an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota.

Since 1997, Professor Perry has been a member of the Board of Scholars for the Mackinac Center for Public Policy, a nonpartisan research and public policy institute in Michigan.